Oil prices slumped by 2% early on Thursday after Fed Chair Jerome Powell told Congress that further interest rate hikes are coming in the second half of the year after a pause last week.
As of 8:11 a.m. EDT on Thursday, ahead of EIA’s weekly inventory report, the U.S. benchmark, WTI Crude, was trading at $71.12, down by 1.92% on the day. The international benchmark, Brent Crude, was falling by 1.84% and traded at $75.67.
On Wednesday, Brent settled at above $77, the highest settlement since May 24, as the U.S. dollar fell. But prices resumed their slide early on Thursday.
Fed’s Powell on Wednesday told Congress in his half-year testimony on the economy to lawmakers that further rate hikes would be necessary to fight inflation. Powell’s testimony continues later on Thursday, and additional comments could also sway oil, equity, and bond markets.
Commenting on last week’s decision to hold interest rates unchanged, for now, Power said, “We didn't use the word pause and I wouldn't use it here today.”
The outlook for two more rate hikes by the end of 2023, included in the Summary of Economic Projections released by the Fed last week, “is a pretty good guess of what will happen if the economy performs about as expected,” Powell said.
“Powell has implied that the Fed’s mantra is now curbing inflation over negating the possible adverse after-effects on economic growth from tighter credit conditions,” Kelvin Wong, senior market analyst at OANDA, said on Thursday.
In Europe, the Bank of England on Thursday surprised markets with a large 50-basis-point interest rate hike, the 13th consecutive increase, after inflation data from Wednesday showed the UK’s May inflation was stuck at an annual 8.7%, flat compared to April and higher than expectations.
Apart from interest rate chatter, the market will be looking today at EIA’s weekly oil inventory data, after the American Petroleum Institute (API) estimated on Wednesday a decline of 1.246 million barrels in crude oil inventories in the United States, against expectations of a smaller 433,000-barrel draw.
By Charles Kennedy for Oilprice.com
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Dr Mamdouh G Salameh
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Global Energy Expert